Austrian economist Robert P. Murphy writes:
As shocking as these developments [drops in stock prices and increased volatility] may be to some analysts, those versed in the writings of economist Ludwig von Mises have been warning for years that the Federal Reserve was setting us up for another crash.
The key words in this quote are “have been warning for years.”
Let’s say that you warn people that a price will fall. It keeps rising. Finally, years after your warning, the price falls. But it falls to a level well above the level it was at when you made your warning. How useful, then, was your warning?
I think not very.
Notice that the closing index for the S&P 500, a better measure than the Dow-Jones, which measures only 30 stock prices, was 1104.49 at the end of February 2010. As I write this, it’s at about 1,890. Which means it has fallen to about the level it was at–in April 2014.
Question for Bob Murphy and other proponents of the Austrian Business Cycle Theory: is there any evidence conceivable that, if you believed it, would convince you that your theory is wrong?
READER COMMENTS
Greg G
Aug 26 2015 at 1:41pm
>—“have been warning for years.”
Yeah. ALL the years. Good point David. It’s not impressive when a broken clock is right twice a day.
Matt Moore
Aug 26 2015 at 1:52pm
I’m reminded of a friend who has predicted six of the last two recessions…
August Hurtel
Aug 26 2015 at 2:05pm
“Have been warning for years.”
This is more like the kid who keeps telling you the magician’s tricks are fake. He’s right, but you want to enjoy the show, and you aren’t feeling particularly hurt right now.
Roger Koppl
Aug 26 2015 at 2:06pm
David, I think you make a great point about “warning for years.” But your challenge to Austrians is mistaken. Straight falsifications are rare. The point here is pretty familiar and often associated with the names Duhem, Quine, and Lakatos.
Austrian Business Cycle Theory (ABCT) is an if-then proposition. IF you have a modern more or less “capitalist” economy and IF you have monetary expansion, THEN (CETERIS PARIBUS) you’ll get an unsustainable boom. That’s not something you’re going to falsify by pointing some one historical episode. That not way it works. The precession of Mercury (okay, okay, the unexplained part of the behavior of . . . ) did not falsify pre-relativistic celestial mechanics. Nor should it have.
If we were perfect logicians, we could say that theory is “true” just because we were careful in our reasoning. The question is only when our theory applies to history. If we keep finding that ABCT is not applicable where we thought at first it likely would be, then we might end up loosing interest in the theory. That’s not falsification.
I said the theory is “true” if our reasoning is right. But some guy named Mill pointed out that we’re imperfect logicians and, as Mill may also have pointed out (I don’t remember) we are not perfectly explicit about all of our assumptions and all the steps in our reasoning. So reasoning is fallible and we need to use history to test theory. But observation is fallible too, so we need theory to test history. In this disappointing situation, we’re not going to get falsifications, let alone verifications. We get a kind of dialogue between theory and history with no guarantee that we will always move closer to the truth. Bummer that, but that’s as good as it gets. It is no criticism of ABCT to say that it’s not immune from these limits of testability.
BZ
Aug 26 2015 at 2:16pm
“is there any evidence conceivable that, if you believed it, would convince you that your theory is wrong?”
Is ABCT a praxeological conclusion? If so, would your question be similar to “What evidence would convince you that demand curves can slope upwards?” or “What evidence would convince you that triangles can have 4 sides?”
Either way, I can think of a few possible empirical observations that would hurt ABCT:
1. Evidence that monetary inflation is realized in the economy in fair proportions. I.E. No distribution effects.
2. Evidence that monetary inflation is directed into wise and productive long term projects in exact proportion to consumer willingness to withhold consumer purchases. The economies productive capacity grows with the monetary base. (e.g. more wood for homes and more homes people can pay for) So, no correction needed.
3. Evidence that monetary inflation is not directed into long term capital as much, but tends to flow into consumer good industries (retail expansion, expanding capacity for retail goods).
Greg Jaxon
Aug 26 2015 at 2:21pm
Fortunately, von Mises was neither the latest nor the only voice of Austrian (i.e descending from Carl Menger) economics, and their non-specific Austrian Business Cycle Theory is hardly the crown of Austrian economics’ creation. Murphy’s predictions (consonant with von Mises’), like Milton Friedman’s (that this central planning of floating exchange would all sort out just fine), are both relying on Quantity theories about the value of money. That was certainly not Menger’s take on the question.
What I want to know is whether there was anyone who failed to predict this crash? I have been hearing about this turn of events from nearly every quarter since April 2015 – with even the MSM joining the fray over the summer. Do you know anyone who was blind-sided?
To me it looks like Mr. Market is calling the Central Bankers’ bluff.
Kevin Erdmann
Aug 26 2015 at 2:24pm
The worst part, to me – and this isn’t just limited to the Austrians – is that this sets up a confirmation bias that is satisfied by economic destruction. The “I told you so” is supposed to be about over-investment and inflation. The evidence is overwhelmingly for quite the opposite. Investment levels are far below trend, especially residential. Corporate leverage is low. Bank balance sheets are growing slowly (mostly because of real estate loan stagnation). Inflation is DOA. The recent correction has been associated with a short term deflationary expectation if you look at TIPs yields.
It’s not even close. But, there is a large portion of the population that either (1) presupposes that any gains are going to the undeserving 1% or (2) that regular rates of growth are a bubble. So, it seems that a majority of the country cheers unnecessary economic destruction. But, since the idea that we are in a bubble now is outrageous, in order to achieve their confirmation, we literally have to have policy so bad that we destroy real production.
From the left, it’s based on the denial of the overwhelming complementarity of a free economy and from the Austrians and others on the right, it’s based on the wrongheaded idea that somehow 10 year treasuries would be at 5% if we had tighter monetary policy. And, in the meantime, they are all dancing in the streets whenever their influence is strong enough to create a liquidity crisis.
RPLong
Aug 26 2015 at 2:31pm
Here’s an interesting fact: Only about 1 in 10 smokers get lung cancer. So all those doctors who are warning people to stop smoking to avoid cancer are wrong 90% of the time.
Even worse, of those who do get cancer, their doctors warn them for years, and for years it never happens. (Until one day, it does.)
Are the doctors wrong to warn their patients about the cancer risks of smoking?
Roger Koppl
Aug 26 2015 at 2:48pm
I see some folks are eager to pooh-pooh ABCT. (I don’t mean David.) I never get that. In any event, this moment would seem to be a bad one for such pooh-poohing. This is very much a moment of revival for ABCT. There was a bit of mainstream interest in ABCT before 2008, especially at the BIS. Since the crisis hit, the level of interest, while still low, jumped really a lot. The crisis seems to many non-Austrians a good fit to the Austrian story, and it may have revived attention to both the Wicksellian interest-rate mechanism and the Austrian idea of sectoral shifts induced by “artificially” easy credit.
Greg Jaxon
Aug 26 2015 at 2:49pm
Within the ceteris paribus lies the hidden assumption that economics is linear, like the Equation of Exchange and its Quantity Theory. That assumption gives the term “monetary expansion” a face-validity to which both Freidman and von Mises adhered. The falsifying facts that the Fed nearly tripled its balance sheet with nothing like that factor of inflation have been with us for 7 years now. Following earlier Austrians (Menger & Anderson, who rejected QTM), New Austrians (Fekete & co.) do not make predictions like Murphy’s. Instead they have focused on the death of the Discount Rate and the effect ZIRP must have on the praexeology of what QTM calls “velocity”, and the descent of the gold futures market into backwardation. Those predictions have indeed been accurate – they include the commodity price collapses and the inability of the Fed to back off of the ZIRP policy once committed. LvMI economists have been beating a dead horse since 2005. No one reads the current market action as confirmation of their claims. If you want to criticize Austrianism today, you have to aim higher.
Josiah
Aug 26 2015 at 3:01pm
Roger,
You write:
I see some folks are eager to pooh-pooh ABCT. (I don’t mean David.) I never get that. In any event, this moment would seem to be a bad one for such pooh-poohing. This is very much a moment of revival for ABCT.
If ABCT is worth pooh-poohing at all (and I think it is), then a moment of revival for ABCT is an especially *good* time to pooh-pooh it, not a bad one.
Kevin Erdmann
Aug 26 2015 at 3:03pm
This whole debate is crazy. Here is a graph of nominal GDP growth. If you just showed someone this graph who had no knowledge of US economic cycles and asked them where the central bank was engaged in cyclical overstimulation, the past 15 years would be the part of the graph that they would never choose.
RPLong, you know I love you, but I think you’re begging the question there.
Vivian Darkbloom
Aug 26 2015 at 3:10pm
I haven’t closely followed the prognostications of “Austrian economists”; however, wasn’t the point regarding the Federal Reserve that their extraordinary stimulative measures were artificially propping up asset prices, especially equity prices, and that once that stimulus was removed, those equity prices would fall (dramatically)?
Thus interpreted, “warning for years” takes on a much different meaning. It would mean that the fall would occur when the sauce is removed, or seems imminent to be removed (maybe this is the “if, then” point made above by commenter Koppl, but I’m not sure). I also can’t be certain that this was the meaning of those warnings, but I think it was. Viewed in this way, that Fed policies can’t be reversed (ever) without causing damage, and that the Fed was painting itself (and everyone else) into a corner, the timing doesn’t seem off (with tightening widely expected in September). This doesn’t seem contrary to what even Market Monetarists are saying. Haven’t Market Monetarists been saying “for years” that tightening Fed Policy would be disastrous? The difference seems to be that the objection of Austrians is that the Fed cannot follow the same stimulative policy forever and the longer they continue that policy, the greater the ultimate price to be paid upon exit, because *any* exit will be costly.
I’m not sure if Jim Grant is an “Austrian”, but my impression is that he is sympathetic to their reasoning and he above seems consistent with what he’s been saying (he has said as well that QE etc have caused structural problems due to mis-pricing of assets and too easy credit that this has slowed the recovery to date).
Also, linguistically, “setting up for another crash” doesn’t mean tomorrow or the next day.
I don’t have a dog in this fight and I’m certainly not as smart or learned as the members of the competing economic tribes duking it out here; but, it will be interesting to look back on this a decade or so from now. We might then all have a much better perspective so that maybe, just maybe, “next time will be different”.
James Hanley
Aug 26 2015 at 3:25pm
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Dan W.
Aug 26 2015 at 3:34pm
Stocks “follow the money”. I don’t know who owns that theory but it explains the stock market and why everytime there is a sell-off there are calls to keep money “cheap” or to make it “cheaper”.
Greg G
Aug 26 2015 at 4:16pm
Regardless of the specifics of the situation, when you go to a chiropractor you know your problems are going to be blamed on a spinal subluxation.
Regardless of the specifics of the situation, when you go to an Austrian economist you know your problems are going to be blamed on the Fed.
Joe
Aug 26 2015 at 4:19pm
David,
Love your posts, but this one is a bit embarrassing.
Yes, stock prices have gone up. They are nominal. I know you understand inflation and Cantillon effects. If Zimbabwe had “crashed” after its inflation to a higher nominal level than when they began inflating, you would say it wasn’t a crash, and ABCT is bunk? Strange that you would print that.
And the crash isn’t even truly begun.
The core of econ is a bit like physics (although impossible to measure and quantify like physics). If I drop something, I look down. Now, it could have bounced, or been caught by the wind, but that doesn’t mean gravity is bunk. And if it were as hard to do a controlled experiment testing gravity as it was testing, say, the law of demand, then I I guess I would be hearing you asking what all those gravity nuts would accept as falsification.
Oh well.
John
Aug 26 2015 at 5:00pm
If you toss a rock in the air and as it continues on its upward course, is someone wrong if he notes that the rock is going to eventually fall down? No matter how long the rock continues to elevate, we know that the person is right that the rock must come falling down. Such is the same when as when an advocate of the ABCT warns that the economy must eventually come down from artificially low interest rates, no matter have long it takes. Just as the very act of tossing the rock into the air ensures that it will inevitably fall, artificially lowering rates is the very act that ensures malinvestments will be exposed leading to the economic downturn. “Is there any evidence conceivable that, if you believed it, would convince you that your theory is wrong?” That question could only be answered if all central planning was removed from the role of money. Such a concept has never been tried in America’s brief history.
Bob Murphy
Aug 26 2015 at 5:14pm
I rationally expected that critics would object in the way David has done, before he posted it. See my final remarks in this post.
Vivian, if you read the article David linked to, you’ll see that my overall position is close to what you are describing.
David, I’ll think about your challenge, but by the same token, what would it take to shake your faith in the EMH? Do you think there was a random variable that kept having realizations up/down/up/down/up/down this week?
Peter Lewin
Aug 26 2015 at 5:21pm
What Roger Koppl said.
Failure to convince is hardly a good test of the argument. Confirmation bias often dominates – in the social sciences, but not only in the social sciences – also in religion, climate science and other contexts.
There are none so blind as those who will not see, and none so deaf as those who will not hear.
Michael Byrnes
Aug 26 2015 at 5:35pm
1. Any monetary policy can be tightened excessively. Even a pure gold standard economy where physical gold is exchanged in all monetary transactions. (Maybe you have a negative shock to gold mining, or a kleptocratic government, or a wealthy country is overrun by Mongols, or something.)
2. Any excessive tightening of monetary policy is going to cause some people to be unable to pay back their loans, some people to hold off of purchases to accumulate higher balances, some businesses to fail, etc.
3. Given #1 and #2, all growing monetary economies are in “unsustainable booms”, and the ensuing busts are therefore entirely predictable.
Vivian Darkbloom
Aug 26 2015 at 5:35pm
@Bob Murphy
Actually, I had not read your full post prior to writing the above comment (I should have done more homework). But, between then and reading your comment, I did go to the full post and this caught my eye:
“As the chart indicates, the impressive bull market in U.S. equities has been tied directly to the Fed’s unprecedented asset purchases. Specifically, since the crisis in 2008 the Fed has purchased trillions of dollars of Treasuries and mortgage-backed securities (these were the so-called “toxic assets” of the financial panic), quintupling its balance sheet in just seven years. The purchases came in three waves of “quantitative easing,” and the chart shows that the U.S. stock market generally rose in synch with these purchases.”
So, yes, I think this supports my initial idea and your last comment. Perhaps I got lucky. As I said, I don’t even think this, by itself, contradicts what Market Monetarists have been saying (for years)—if the Fed removes support or greatly reduces it (or, even now, doesn’t increase it?), equity prices will suffer even though there appear to be other, deeper reasons of disagreement over that policy.
I think the “have been saying for years” quote was therefore taken greatly out of context and this strikes me as a bit of a “gotcha” game which, unfortunately, seems much too common among competing economic schools (of all persuasions), particularly when the competition is in this type of blog format.
Jim Caton
Aug 26 2015 at 5:38pm
David,
My response is not so much about Bob Murphy’s argument as it is conveying the ABCT in a manner that I think would resonate your background.
http://moneymarketsandmisperceptions.blogspot.com/2015/08/re-david-henderson-defense-of-austrian.html
David R. Henderson
Aug 26 2015 at 6:10pm
@Roger Koppl,
Straight falsifications are rare.
Fair enough. But then aren’t straight confirmations rare also? Shouldn’t you also be criticizing Bob Murphy for seeming to say that the latest crash is not surprising for fans of Mises?
@RPLong,
Are the doctors wrong to warn their patients about the cancer risks of smoking?
First, good point. Second, I think the analogy breaks down because of the data. Stock prices are well above where they were when Bob Murphy and others made their warning. So, if I stick with your analogy, Bob’s writing this paragraph the way he did would be like a doctor saying to someone who didn’t get cancer after years of smoking, “See? I warned you.”
@Joe,
Love your posts,
Thanks.
but this one is a bit embarrassing.
Not to me.
Yes, stock prices have gone up. They are nominal. I know you understand inflation and Cantillon effects.
I do. And because inflation has been so low over the last few years, inflation adjustment would have made hardly any difference. Just eyeballing the data, inflation-adjusted stock prices have dropped to where they were sometime in 2013, which represents huge real growth in prices after Bob gave his warning.
@Bob Murphy,
David, I’ll think about your challenge, but by the same token, what would it take to shake your faith in the EMH?
I’ve never had faith in the EMH. I’ve had confidence in the EMH, which, as you know, is different. But my confidence is much lower than it used to be–precisely because of the evidence. In other words, the evidence has made me much less sure of the EMH.
Kenji M.
Aug 26 2015 at 6:10pm
I may be punching above my weight class here, but ABCT is in no way tied to the quantity theory of money. von Mises states that explicitly in Human Action.
It’s really about the (mis)pricing of capital relative to the revenue generated by its output. Hayek, Skousen, and Garrison have a lot to say about this. While I haven’t been able to dig into Roger Garrison and Marc Skousen’s work to the extent I have von Mises or Hayek, they essentially elaborate on Hayek’s essays from Prices and Production, which were themselves a more “practical” elucidation of the theories von Mises presented in Human Action.
I tend to look at things through the lense I acquired while obtaining my Bacherlor of Commerce: For those versed in some basic business math, monetary expansion can be interpreted as a manipulation of a company’s Cost of Capital as well as a systematic falsification of the time value of money (ie: a manipulation of the denominator in the Net Present Value calculation). Basically, IF (h/t Roger Koppl) it is accepted that monetary expansion influences interest rates and asset prices, THEN it most certainly has an effect on the carry cost of capital goods as well as on the expected future return of an investment.
The question then becomes: If we manipulate the interest rate, are we creating a business environment that will persist once the fed “takes away the punch bowl” and begins to undo the manipulation?
Charlie
Aug 26 2015 at 6:29pm
The last time Murphy wrote his “I told you so column” was Aug. 8, 2011. Since then the market is up 60%. Apparently he will write an I told you so column every time the market goes down from here to eternity. Apparently he thinks the EMH view is that markets never go down.
Charlie
Aug 26 2015 at 6:30pm
Here is the column:
https://mises.org/library/why-stock-market-plunging
David R. Henderson
Aug 26 2015 at 6:34pm
@Charlie,
The last time Murphy wrote his “I told you so column” was Aug. 8, 2011. Since then the market is up 60%. Apparently he will write an I told you so column every time the market goes down from here to eternity.
That’s a fair criticism.
Apparently he thinks the EMH view is that markets never go down.
That’s not.
Charlie
Aug 26 2015 at 6:44pm
Then describe his view of EMH. Or do you think he’s being disingenuous writing this column every time the market falls?
I am just accusing him of being wrong, not dishonest. It seems your reading is less charitable.
Roger Koppl
Aug 26 2015 at 7:01pm
David,
You’re processing a lot of comments, which makes it hard to totally get what each person has said. If you look more carefully at my initial comment, however, you’ll see that I’m totally there on both points you raise, which I address explicitly in much the way you suggest in your response to me. And BTW it’s not really kosher to say, “Shouldn’t you also be criticizing Bob . . . ” Not really. The comment I wished to respond to was yours, not Bob’s.
Nicolas Cachanosky
Aug 26 2015 at 7:22pm
I agree with Roger. Just as there is no confirmation of a theory, there is no (final) refutation either.
But I think David’s question is a little ambiguous. What does “wrong” mean in ‘what would convince you that the theory is wrong?’
Does wrong mean inconsistent, that it cannot give a point prediction, or that is empirically irrelevant?
The main and distinctive argument of the ABCT is the effect on the average duration (roundaboutness or average period of production) of the economy when interest rate changes [ABCT is it not about cantillon effects inside the price level of final goods and services). As long as we consider the interest rate the price of time, then it follows that a change in the price of time will affect the average duration of the economy.
I wouldn’t say that the theory is wrong if it cannot give a point prediction. It is clear that all the conditional assumptions implicitly and explicitly used in a theory are not ceteris paribus in the real world.
I would neither consider a theory wrong if it’s empirically irrelevant or with low significance.
I would not consider an issue IF when the prediction occurs, there is also a convincing explanation of why the prediction happened at that particular point in time that is consistent with the theory. If when the prediction happens, the added explanation of why the crisis happened at that particular point is not convincing or consistent with the theory, then maybe we have an issue. So I don’t see why Bob’s position should be equally objected as long as we don’t consider there is something odd between the theory’s prediction and argument of why it happened in a particular point of time.
Let me put it this way. If my doctor says that if I smoke like chimney I may get cancer *someday*, I don’t think I’ll challenge his theory because when the day comes he says “I told you so”.
Charlie
Aug 26 2015 at 7:36pm
“David, I’ll think about your challenge, but by the same token, what would it take to shake your faith in the EMH?”
The strongest evidence against the crass criticisms of the EMH that Bob Murphy has in mind has always been the literature on active management. We know Michael Jordan and Usain Bolt are good, because day after day, they beat there opponents. It turns out the fund manager data looks totally different. Managers that have 5 or 10 years of outperformance, do no better than chance in the following years. They don’t just regress toward the mean, they become the mean. The literature goes all the way back to Jensen (1968).
Of course, this data could have come out differently. The stars could have continued to be stars. That would be very strong evidence against the EMH. Fama and French (2010) really blew the doors off the literature, but looking at the distribution of manager performance and showing that it looked exactly as expected if all alpha was due to chance. [There is debate about whether managers can earn back there fees. It seems they can earn enough to justify some, but not all their fees. So that means tiny exploitable inefficiencies.]
There is another form of anti-EMH, that basically says when it’s hard to take the opposite position, then EMH will fail. That is, as Stephen Ross says, “the EMH is a theory of sharks” a theory of competition. If someone can’t make money off an inefficiency, due to some friction, then it is much more likely to deviate from EMH. This is where behavioral finance has arguably been most successful.
David R. Henderson
Aug 26 2015 at 8:27pm
@Roger Koppl,
And BTW it’s not really kosher to say, “Shouldn’t you also be criticizing Bob . . . ” Not really. The comment I wished to respond to was yours, not Bob’s.
Fair enough. So let me change the question, to get it away from the “should.”
New question: “Would you also criticize Bob Murphy for seeming to say that the latest crash is not surprising for fans of Mises?”
John Becker
Aug 26 2015 at 10:17pm
Economics really isn’t an empirical discipline. You won’t prove or disprove anything to an Austrian, Keynesian, Marxist, or Monetarist with cherry picked data from a complex and multi-causal world. Were you more influenced to a free market view point by a graph or by appeals to common sense and emotion like Bastiat or Ayn Rand. We all know the answer to that.
Brian Albrecht
Aug 26 2015 at 11:00pm
I’d pose a related question to Bob (and to any other economist who has a theory they keep promoting). Of course, anyone who is confident in ABCT is welcome to respond.
What event have you seen that provides evidence against the empirical relevance of ABCT?
I’m putting aside the theoretical concerns or the if-then issue that Roger raises. I’m also not involving any bold claims about proof of the theory. I’m just asking for one data point that caused you to update away from ABCT.
Roger Koppl
Aug 26 2015 at 11:32pm
Apparently, I’m be cryptic. I thought I had twice said as plain as day that you were right to criticize Bob’s “warning for years” remark. I did not read Bob’s original post, so I am not in a position to say much on this score, however, and I am starting to worry that said agreement on my part may have been based on a misunderstanding. But yeah, the remark you quote seems inappriate to me for reason you give in your original post above. All apologies to Bob if the full context tells another tale.
Nathan W
Aug 27 2015 at 8:33am
His request essentially requests them to enter the scientific process. Is your theory falsifiable? If so, what could falsify it. Now lets go see if we can poke holes in the theory.
If it’s not falsifiable, and the only evidence of interest is cherrypicked cases which corroborate the theory, then it’s really not a very useful theory.
Nathan W
Aug 27 2015 at 8:54am
Reminds me of how some people have been predicting the demise of China for about a decade, and now that stock prices (but not GDP) has retracted all of 6 or 10 months of its advance, you get those who will say “see, I said all along that it was going to implode”, as though they had some special insight, whereas it’s sort of inevitable that eventually some particular area of bubble will be corrected or the business cycle will hit if you sit and watch for long enough.
Similarly for China, the insight is about as profound as “sometimes things will retract a bit, sometimes more so than others”, whereas the naysayers will insist that they have correctly predicted implosion after having called for the demise endlessly for years.
Of course, when the decline comes, you can attribute everything to your pet theory. But people who do not ascribe to your pet theory can just as easily observe that “there is a business cycle, and sometimes animals spirits may cause the ups and downs to be exaggerated compared to what is warranted by fundamentals”.
Roger Koppl
Aug 27 2015 at 10:31am
Okay, I have now read Bob’s post. In the first paragraph Bob makes the offending remark, which is indeed subject to the criticism David makes. But if you keep reading you find this at the end: “Austrians have been warning for years that the entire system was fragile.” That seems to be Bob’s real point, and it seems perfectly reasonable. The system is fragile. Austrians aren’t the only ones saying so, with Taleb being, perhaps, the more salient example. You get similar notions in other fields, such as the “human factors” literature created by guys like James Reason and Charles Perrow. A system such as a nuclear power plant may function well for a long time before a “latent error” existing from the start turns into a perhaps disastrous “active error.”
We’re talking about a newspaper piece, so we should probably go easy on Bob for that initial remark. If you’ve published this sort of thing, then you know that it can be hard to get a really good, precise, clear text through the process. So let’s stay in the judgment-free zone, I’d say. It might be that Bob is sticking too closely to the standard potted version of ABCT and tells, therefore, a bit too simple a story. Yes, perhaps. Maybe. If so, then I would say again that it’s a newspaper piece. For that reason I am not interested in exiting the judgment-free zone.
RPLong
Aug 27 2015 at 11:58am
I think part of the problem is that we’re all focusing on one or two data points or series. Part of my attraction to ABCT is that it’s supposed to be holistic. If Bob’s point is that this one crash was predicted by ABCT, then I think that’s a bad point.
But if Bob’s point is that this one crash was predictable by ABCT, then I think that’s a much stronger point. Unfortunatley, I don’t think he defended that point in his article. (I also don’t think that was his purpose in writing the article.)
To increase confidence in ABCT, someone as smart as Robert Murphy would have to say, “Here’s why I think these stocks are over-valued, and here’s why I think you should invest in these other things instead.” The fact that so few “Austrian” economists write those kinds of articles is what weakens my confidence in ABCT. They have a good story, but I never see a good, specific application of it.
As for what evidence would convince me ABCT was wrong? It wouldn’t be a set of market data points, it would be a scenario in which credit expansion lead to lower rates of malinvestment/fewer bubbles/better long-term investment performances. Has that ever happened?
Chicago School Economist
Aug 27 2015 at 5:36pm
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Kevin Erdmann
Aug 27 2015 at 5:42pm
RpLong, we know what over expansive monetary policy looks like – the 1970s. That’s why this is all question begging. The 2000s don’t look anything like the 70s, except for rising nominal home prices. Before we even ask what it would take to disprove the theory, Austrians have a huge question to answer – why doesn’t this look like the 70s looked? I don’t see any serious attempt at answering that, just question begging. To go back to your analogy, it would be like walking into your doctor’s office with a steamed carrot sticking out of your mouth, and your doctor says “cigarettes will kill you, ya know.” Then, every time you catch a cold, he says, “See. Told you so.”
David R. Henderson
Aug 27 2015 at 6:24pm
@RPLong,
I think you and I are converging.
If Bob’s point is that this one crash was predicted by ABCT, then I think that’s a bad point.
You and I agree.
But if Bob’s point is that this one crash was predictable by ABCT, then I think that’s a much stronger point. Unfortunatley, I don’t think he defended that point in his article. (I also don’t think that was his purpose in writing the article.)
But then why was it predictable by ABCT? We agree, though, that he didn’t defend this point in his article. I don’t know what his purpose was. I don’t like to get into motives.
To increase confidence in ABCT, someone as smart as Robert Murphy would have to say, “Here’s why I think these stocks are over-valued, and here’s why I think you should invest in these other things instead.”
I agree.
The fact that so few “Austrian” economists write those kinds of articles is what weakens my confidence in ABCT.
It’s one thing that weakens my confidence too.
They have a good story, but I never see a good, specific application of it.
They do have a good story and I have seen some good, specific applications, but I wonder if they’re cherry picking.
As for what evidence would convince me ABCT was wrong? It wouldn’t be a set of market data points, it would be a scenario in which credit expansion lead to lower rates of malinvestment/fewer bubbles/better long-term investment performances. Has that ever happened?
I don’t know. More important, I don’t think any Austrian would even try to figure it out. To do so, they would need a measure of malinvestment. At an APEE session that I attended in Cancun that was devoted to Roger Garrison, I asked him if he had ever tried to find empirical counterparts of his theory. He said he hadn’t and, IIRC, he said that one couldn’t.
Levi Russell
Aug 27 2015 at 8:07pm
So based on your above comment, David, Austrians have to become financial market advisers to convince you that ABCT is a useful theory?
David R. Henderson
Aug 27 2015 at 10:41pm
@Levi Russell,
So based on your above comment, David, Austrians have to become financial market advisers to convince you that ABCT is a useful theory?
No. It’s more that when they talk about financial markets they need to have some insight into them. And if so, that would, as I said, increase my confidence.
Levi Russell
Aug 27 2015 at 10:44pm
“At an APEE session that I attended in Cancun that was devoted to Roger Garrison, I asked him if he had ever tried to find empirical counterparts of his theory. He said he hadn’t and, IIRC, he said that one couldn’t.”
Here’s one of several examples of empirical counterparts:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2411022
Levi Russell
Aug 27 2015 at 10:53pm
I agree Bob’s language was sloppy, and he probably should have been more careful given his reliance on the theory in his inflation bet with you.
The theory itself isn’t about the S&P 500 or inflation though, which I guess is related to Roger Garrison’s comments to you.
David R. Henderson
Aug 27 2015 at 11:19pm
Thanks for the cite, Levi Russell. It’s a step but it’s not empirical.
Levi Russell
Aug 28 2015 at 12:12am
Good point.
Here are some more (some empirical ones this time, though I’m sure there’s some way to operationalize the paper I cited above):
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2363560
https://puntodevistaeconomico.wordpress.com/2013/09/02/the-abct-making-its-presence-in-the-maintream-literature/
http://www.bis.org/publ/work395.htm
Maurizio
Aug 28 2015 at 1:50am
About the “what would convince you that the theory was wrong” question…
If money keeps being printed and, at the same time, neither two-digit price inflation arrives, nor production collapses due to capital consumption, for me it would be enough to stop believing in Austrian theory (even if it would not be technically disproved). There is a difference between something being falsifiable and being reasonable to believe. At that point, Sumner would make more sense.
RPLong
Aug 28 2015 at 10:57am
Prof. Henderson –
This is a really good, important point. I’ve never heard of a specific measurement of malinvestment, either.
Kevin –
I’m not sure that ABCT hinges on a comparison to the 1970s any more than it hinges on a comparison to the Great Depression. I think comparing/contrasting to past business cycles is informative, but I don’t think any theory relies on that process before it can proceed to other steps. But I don’t know a lot about the history of business cycles, either, so maybe I’m out of my depth on that.
Enial Cattesi
Aug 29 2015 at 2:20am
There is no need for measurement. If you build a house on sand and someone tells you that this isn’t the sane, going by calling the person crazy for not providing numbers doesn’t help your case.
Just my 2 cents.
Kevin Erdmann
Aug 29 2015 at 5:08pm
Enial, you’re begging the question. It’s not sand.
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